“A 20 percent [premium] subsidy would increase the number of subscribers in the individual market by 5-11 percent and decrease the number of uninsured people by 1-3 percent,” the researchers report. That comes from 1-2 percent more potential purchasers deciding to buy insurance and about 15 percent fewer current enrollees dropping coverage, as a result of the 20 percent subsidy.

Price subsidies could also help promote whole-family coverage and continuity of coverage, Marquis and coauthors say; however, subsidies “are likely to be an inefficient way to achieve” these goals, since many who receive the subsidies would have covered their children, or continued coverage, even without the price break. On the flip side, premium subsidies in the individual market “would not lead to an unraveling of the group market as some fear”: A 20 percent individual market subsidy “would reduce the number of workers participating in their own plan by less than 0.05 percent.”

Making Information More Accessible Is As Important As, Or Even More Important Than, Cutting Premiums

Marquis and coauthors argue that attacking nonprice barriers, especially the difficulty of obtaining information, could increase individual market participation as much as, if not more than, price subsidies. “For example,” they say, “if one could reduce the perceived costs of search from the mean to the lowest twenty-fifth percentile of perceived information search costs, purchase rates would increase” by 9 percent, achieving the same impact as a 20 percent price subsidy. Getting the average cost of information search down to the level of the lowest tenth percentile would increase participation by 30 percent.

The study is based on an analysis of the California individual insurance market. The authors explain that they restricted their analysis to one state “to obtain detailed information about benefits, premiums, and choices in the market,” but that their findings are likely to generalize to most other states. The research was funded by the California HealthCare Foundation, and Health Affairs is publishing the study as a Web Exclusive with support from the Foundation.

Marquis’ team describes an individual market that, particularly for older subscribers, is often more than a short-term bridge over gaps in group coverage. About 60 percent of those who bought coverage kept it for more than a year, and more than 30 percent kept it for more than three years.

Individual Market Diversity: The Good And The Bad

The researchers also found “wide variation in the actuarial value of products that people selected … In 2002, about 25 percent of people who bought individual products enrolled in plans that would pay about 95 percent of total spending for a standardized population, and about 25 percent selected plans that would cover less than 67 percent.” In the view of Marquis and coauthors, this variation indicates that preferences vary and that “purchasers derive value from having the range of choices” that the individual market -- in contrast to the group market -- offers.

However, as the study notes, “some argue that the very diversity of products that insurers offer is an attempt to separate risks and charge them different prices,” and on this score the study delivers a mixed verdict. On the one hand, Marquis and coauthors report that their analysis “confirms earlier studies’ findings that there is considerable risk pooling in the individual market and that high risks are not charged premiums that fully reflect their higher risk.” The researchers point out that “guaranteed renewal, required by [the federal Health Insurance Portability and Accountability Act], means that those who enroll and become sick cannot be excluded from the pool, and in practice they are not placed in a new underwriting class.”

On the other hand, because underwriting in the individual market prevents some high-risk consumers from getting coverage in the first place, “those who obtain health insurance are in better health than those who remain uninsured.” Moreover, while “consumer choices are only modestly affected by benefit design, our results suggest that it will be easier to attract healthy subscribers than high-risk subscribers to high-deductible policies,” Marquis and coauthors say. “Currently, PPO products with high cost sharing are primarily subscribed to by those in good health, and larger premium reductions are needed to induce subscribers in poor health to switch to high-deductible plans.”

A 4 percent premium decrease would be enough to get healthy beneficiaries to switch to a plan with a 50 percent higher deductible, but it would take a 5.5 percent price cut to get riskier beneficiaries to switch, the researchers report. “This suggests that there is potential for selection in consumer-directed health plans -- an outcome that worries many critics of the new plans.”

Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org.